INDEXING DEVELOPMENTS
By Journal of Indexes Staff

Case-Shiller Expands

S&P and Case-Shiller expanded coverage for their popular Home Price Indices from 10 to 20 metropolitan areas, adding Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland (Oregon), Seattle and Tampa to the mix. The group will now publish Composite indexes covering both the original 10 and the expanded 20 indexes.

The indexes—and the Chicago Mercantile Exchange-traded (CME-traded) futures contracts that track them—have established themselves as the preeminent measure of home prices in the U.S. The added cities improve the benchmark by helping to overcome its most obvious shortcoming: geographic coverage. Even with the expansion, there's still a dearth of representation in the heartland.

Hedge Funds Lose

The relentless arithmetic of fees ended up costing hedge fund investors once again in 2006, as most major hedge fund indexes trailed their equity index counterparts. The Greenwich Global Hedge Fund Index, for instance, rose 12.07 percent, but trailed the S&P 500's 15 percent-plus return by a handy margin. Similarly, Hedgefund.net's Emerging Markets Index jumped nearly 22 percent on the year, which sounds pretty good until you consider that the MSCI Emerging Markets Index rose approximately 30 percent.

So Do Active Funds

If hedge funds investors suffered, at least they had company: S&P released its year-end Index vs. Active (SPIVA) comparison and showed that the S&P 500 outperformed 69.1 percent of large-cap funds, by an average of 3 percent. Meanwhile, the S&P SmallCap 600 led 63.6 percent of small-cap funds, by an average of 2 percent. Only mid-cap shareholders were better off active, with the S&P MidCap 400 losing to 53.3 percent of actively managed mid-cap funds by an average of 34 basis points.

S&P Moves Into SRI

S&P made two significant moves into the socially responsible indexing (SRI) space recently.

The first involved a partnership between S&P, SRI pioneer KLD Analytics and the Indian rating agency CRISIL, who teamed up to create a socially responsible benchmark for Indian equities. The move is funded by the World Bank as a way of promoting safe and stable development in the region. SRI is a natural fit for emerging markets, as investors are understandably concerned about human rights, environmental issues and other practices in those regions.

S&P also launched new, Shariah-compliant versions of its three most important global indexes: the S&P 500, S&P Europe 350 and S&P Japan 500. The new indexes are designed to provide similar exposure as S&P's standard indexes, while screening out companies that fall short of standard Shariah restrictions: alcohol, weapons, entertainment, tobacco, etc.

Indexing IPOs

IPOX Schuster, developer of the first initial public offering (IPO) indexes, has recently diversified its index offerings in a number of new directions.

First, in October, the group teamed up with the New York Stock Exchange (NYSE) to develop two indexes based on recent IPOs on the NYSE: the NYSE IPOX U.S. Index Composite Index tracks all new IPOs listed on the NYSE, while the NYSE IPOX U.S. IPOX Index tracks only domestic U.S. IPOs.

The twin indexes provide insight into the differences between U.S. and non-U.S. IPOs. The most glaring one is size: The 19 foreign IPOs that happened over the past four years had an average market cap of more than $9 billion, while the domestic IPOs had an average market cap of just $400 million.

The second set of indexes launched by IPOX Schuster tracks the performance of IPOs in two hot regions: China and the so-called BRIC countries (Brazil, Russia, India and China).

The BRIC index, called the IPOX BRIC 25, holds 25 recent IPOs from those hot markets. The name is currently a misnomer, however, as the index has no Indian companies—a result of restrictions on foreign ownership of domestic Indian stocks.

Josef Schuster, founder of the group, said that the index was launched as a BRIC product to leave open the possibility of adding Indian representation when that becomes possible. Currently, the BRIC index is dominated by China, at 55 percent of the market capitalization.

The exclusive China index holds 20 large-cap Chinese stocks listed outside of mainland China. The index rose 12 percent in its first week on the market, during the December boom in Chinese stocks.

DFA's International Real Estate

With the U.S. real estate market teetering, investors are increasingly looking overseas for real estate exposure. There is a feeling that in real estate, as in other asset classes, different parts of the world are positioned at different points of the investing cycle, and that diversifying overseas offers the potential to boost long-term returns.

Jumping on this bandwagon, indexing giant Dimensional Fund Advisors (DFA) has filed with the SEC for the right to launch an international real estate fund. The fund will generally follow a free-float, market-cap-weighted index methodology, although it has the discretion to deviate from that to ensure adequate country diversification. It focuses largely on developed, ex-U.S. markets, although curiously, it includes three countries generally thought of as emerging markets: Turkey, Taiwan and South Africa.